What Happens If I Can’t Pay My Student Loans?

What happens if you don't pay your student loansThese days, it’s not uncommon for people to be worried about what you can do if you don’t pay your student loans. But if you’re in a position where you might not be able to make your student loan payments, your first step should be to get informed about your rights and learn what actions can help you navigate through this challenging situation.

It’s always important to call your lender and attempt to work out an agreement with them, rather than simply ignore the problem or hope it will go away.

Below, we’ll explain each step of the process to prepare for what happens if you don’t pay your student loans. When you think you are going to have problems making the monthly payments, you need to take action immediately and use these answers to determine your best course of action:

Should I use deferment if I can’t pay my student loans?

You should definitely consider it. But first, let’s make sure we understand what it means. Deferment on student loans means that you are not required to make your usual monthly payments (and if the loans are subsidized, then they won’t accrue interest either). To qualify for deferment on federal loans, the Department of Education states that one of these conditions must be true:

  • You are enrolled in school or a graduate fellowship
  • You are participating in a disability rehabilitation program
  • You are unemployed or facing economic hardship
  • You are on active duty in the U.S. military

What about deferment for private student loans? In many cases, private lenders have similar rules regarding deferment eligibility. If you are afraid of missing payments on a private loan, your first step should be to inquire about deferment. However, if you don’t qualify, this next question is one you should ask…

Should I use forbearance if I can’t pay my student loans?

Forbearance can be a great option for people who can’t pay their loans and are not eligible for deferment. You might wonder, “how is forbearance different from deferment?”

The answer is that while deferment allows you to postpone payments and avoid accruing interest, forbearance means a temporary renegotiation of your repayment plan with your lender. You may be able to reduce the amount of your monthly payments, spread your payments over more years, or even refrain from paying for a period of time. But meanwhile interest charges will continue and will be added to your principal balance.

However, despite the fact that forbearance will not save you from continued interest charges, it can still be a lifesaver if you can’t meet your minimum payments.

What programs are available to help lower my student loan payments?

There are some great programs for people who cannot afford their monthly payments. Most important is the Income-Based Repayment program, which limits your monthly payment to 15% of your disposable income and extends your repayment term to 25 years. While this can cost you more interest charges in the long run, it can be very helpful for people whose monthly payments under the standard repayment plan are simply too high.

Other programs to be aware of are the Public Service Loan Forgiveness Program and the Direct Consolidation Loan Program.

What if I miss a student loan payment?

Sometimes you simply can’t pay and have not been granted a period of deferment or forbearance. When you miss a payment on your student loan, it’s similar to what happens when you can’t pay your credit card, but it depends on exactly how late your payment is.

If you are less than 30 days late on your payment, there might not be any immediate consequence. You may be contacted by your lender or servicer, but they will not usually report you to one of the 3 major credit bureaus at that point, so your credit report and credit score will still be safe.

If you become more than 60 days late on your payment, the lender will probably be contacting you to find out why you haven’t paid and they will try to convince you to pay at least part of the amount you owe. At this point, your tardiness may be reported to the credit bureaus, in which case your credit score would suffer.

How much will my late student loan payment hurt my credit score?

If you become more than 90 days late, you will usually be considered delinquent on your student loan payment, and at that point you will almost certainly be reported to the credit bureaus. This can have a very negative impact on your credit score, especially if your score was relatively high to begin with. For example, if your score is currently above 750, it may drop by as much as 100 points as a result of a being delinquent on your student loan.

Even if your score was not good to begin with, a delinquent account can still take many points off your score – a scenario you always want to avoid if possible.

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What if I default on my student loans?

After around 270 days of not paying your student loans, you would be considered to be in default. Once that happens, your loans will likely be turned over to a collections agency whose job will be to recoup as much of the loan balance as possible from you.

What are the consequences of defaulting on student loans?

The consequences can be very serious. For starters, your entire loan balance becomes due immediately – no more repayment plan. Also, you lose any eligibility for deferment or forbearance. And perhaps worst of all, your loan balance may increase due to the addition of court fees and/or other legal fees associated with the collections process.

Can the government garnish your wages if you default on your student loan?

Yes. If the loans are federal loans, the Department of Education must give you 30 days notice before it begins garnishing your wages, which means up to 15% of your paycheck will be withheld each pay period and used to pay off your loan balance. If your loans are private student loans, your lender will have to get a court order before they can garnish your wages. (You can see the Department of Education website for more information about wage garnishment and other consequences of default)

How do you get student loans out of default?

There are three ways to get your loans out of default:

1. Loan Repayment (more info) – This refers to paying the loan in full. Most people would not be able to pay the loan in full, however, which means the following option would be more realistic…
2. Loan Rehabilitation (more info) – Requires negotiating a new payment plan with the lender; once you have made a certain number of payments as agreed, your loan can be taken out of default.
3. Loan Consolidation (more info) – You can get loans out of default by consolidating them into one consolidation loan, with a fixed interest rate. Any late fees, legal fees, and accrued interest will be added to the principal of the new consolidation loan.

You should research each of these options if you find yourself with defaulted student loans. Each has its advantages and disadvantages, so consider carefully before making a decision.

Hopefully with the tips in this article you’ll never find yourself in default, though! Also, make use of these three great tools: this great site created by the CFPB to help you evaluate the options available to you, our awesome Student Loan Debt Resource Center, and of course, ReadyForZero, which will help you make a plan to pay off all your debts (including student loans, credit cards, etc.) in the fastest way possible.

As always, let us know in the comments if you have any questions and we’ll do our best to answer them!

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  • http://twitter.com/seedebtrun See Debt Run

    Great article.. You really outline all of the options available to folks in this situation!.. Knowing that the government can step in and garnish wages is a bit frightening, really..

    Jefferson

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Thanks, Jefferson! I really appreciate that. And yeah, having wages garnished would be extremely frustrating.

  • http://Www.Plantingourpennies.Com/ Mrs PoP

    The consumer finance protection bureau (one of the better things to come out of the financial crisis of the last few years) has put together this resource…
    http://www.consumerfinance.gov/students/defaultoptions/#ques1

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      That is very helpful – thanks for linking to it!

  • Hopeless

    Not a helpful article. It did not answer the question, ‘What happens if I can’t pay my school loans?’ Living under a bridge with nothing and can’t find work… Will I be sent to prison? When and for how long?

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      The article is intended to show what happens at each stage of the process. If you don’t pay your student loans at all, then you will likely face a court judgement and/or wage garnishment as well as a severely damaged credit score. However, as dire as all those things sound, you can still overcome them. For example, this article describes the situation in more detail: http://abovethelaw.com/2011/06/student-loan-debt-whats-the-worst-that-could-happen/

  • James Hughes

    Im on disability and im in a loan rehabilitation program. Are there companies that will pay this loan for me so that my disability wont be garnish? They told me i cant miss a payment or i would be sued. Please help me. James

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      James, I would advise you to speak with your lender and see what kind of help they can give you. You can also e-mail our support e-mail address with some more details and we can try to find some resources that might help you. Good luck!

  • Brandon

    Hi Ben!
    I am currently only working part-time (around 20 hours a week) and owe on my closed credit card account and student loans. Prior to losing to my well-paying full-time job and obtaining the part-time position, I always paid the minimum balance on time. However, now I am unable to do so…for the most part, I can’t pay much, if anything. Now the companies are calling CONSTANTLY. I have tried to work out something with them, but they are unwilling to help me out. Is there any way I can stop these calls? I am fully aware that I owe the debts, but I can only do what I can do. Any assistance you could provide would be greatly appreciated. Thank you!

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Hi Brandon, sorry to hear about this! That sounds like a really tough situation but good for you for being proactive about tackling this. I am not able to give specific financial advice, but I do know that many lenders will try to work with you if you tell them about what’s going on and explain that you hope to be able to make the payments soon. Some will even allow you to set up a new repayment plan that works better for you. If you try calling your lender and that doesn’t work, then you might want to try talking to a different lender or to the Department of Education. They have a hotline at 800-433-3243. Good luck!

  • Kiki

    Hi Ben,

    My private student loans will go into default tomorrow. I’m wondering, hypothetically of course..what will happen if I get married, quit working and become a stay-at-home mom? What do the collectors do when when I am no longer earning my own money? Can my debt affect my husband? Thanks!

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Hi Kiki, I don’t have a definitive answer for you, but I think this article might be of interest to you: http://abovethelaw.com/2011/06/student-loan-debt-whats-the-worst-that-could-happen/. Other than that, if you have any possibility of continuing to make payments I’d recommend contacting your lender. Many private lenders have an income-based repayment program and they might be willing to work with you on setting up a plan that works for you. The sooner you ask about this the more likelihood there will be of finding a plan that is amenable to both you and the lender.

    • Ann

      Kiki,
      If you file jointly on your income tax with your spouse the gov. will take both your refunds if you should receive any money back.

  • Dan

    I have just started the process of rehabilitating my student loan. My account is with Allied.

    Right off the bat, they told me that the payment was going to be
    $600.00 a month. I had not done a lot of research at this point, and i
    was in a state of panic. No way could I afford that, and they had given
    me a week to come up with it.

    Of note is the fact that I am an expat, and as such Allied could not
    garnish my wages. This would of course not apply to most readers, but
    in the event that your wages have been garnished, it will stop once you
    enter the rehabilitation program. I think they have to stop garnishing
    once you submit a hardship application form. In any event, I know you
    don’t want to spend money at a time like this, but GET A LAWYER. If you
    do, and if you inform the collection agency, they have to stop calling
    your family and friends, and have to stop all skip tracing activity.

    Anyhow, I submitted a hardship application form to get a reasonable
    payment, and the run around began. I was asked to repeatedly re-submit
    the form, and after the fifth time, I was told that all my documenting
    information was out of date and had to be replaced.

    This is when I started to do my research. The thing that turned the
    tide for me was simply this: the collector kept insisting that there
    was a minimum payment for a federal student loan rehabilitation. I had
    him on my answering machine saying it. He was lying. And as such was
    violating the Fair Debt Collections Act.

    If you get the same pitch, get it documented that they are saying
    this. They record your calls and I recorded them too, making sure I
    told them each time. Once you have them on the record claiming that
    there is a minimum payment, email them this:

    http://www.law.cornell.edu/cfr/text/34/682.405

    Tell them they are violating the Fair Debt Collections Act by engaging in deceptive practices.

    I did. And negotiated a $100.00 monthly payment the next day.

    Final note: I am not a legal professional and cannot provide legal
    advice. This post is based on my personal experience and individual
    results may vary.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Wow! That is a really interesting and helpful comment. Thank you for sharing your personal experience so that others can gain some insight from it. I’m glad you were able to get a more reasonable monthly payment.

  • Christal

    Hi Ben, I just got approved to extend my forbearance for another 12 months. I am seriously contemplating applying for a loan consolidation, as I have four loans from two different lenders that accumulate to a minimum payment of around $700/month–thus the reason I used forbearance. If I apply for loan consolidation on my federal loans (even though I just got approved for forbearance), will it carry over to the new loan or will I have to advise them to put me into forbearance if I can’t afford the payments. I know my payments will be reduced, which I am looking for so is it even worth extending my loan for 30 years of payments? Also, should I start applying now or is it too soon to do so?

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Hi Christal, that is a tough question. My understanding is that you would have to apply for forbearance again after the consolidation was completed. However, I’d recommend calling the Department of Education hotline to verify this: 800-433-3243. As for whether you should do it or not, that is ultimately up to you. But in general, finding the path that will result in you paying the least amount of interest possible while giving you monthly payments that you can handle would be best.

  • Jake

    Since Graduating from college I have had a medical hardship. I found out my heart is damaged and have had several EKG’s, Two ECG’s, a left and right heart cath, and a muga scan. All this determined that my heart was too weak, the cardiologist decided to install a pacemaker and put me on medications. I am unemployed and filling out SSD paperwork.

    My Question is, Is there a Medical disability clause since I cant work and dont have any income to pay my student loans, or can they garnish SSD when I get approved for it.

  • Shosanna

    If the government bail the fraudulent bankers who gave away crappy mortgages with taxpayers money, why not bail out people who wanted to be educated citizens?

  • eltessy

    I was kick-out from my doctoral program when I was a year or two to graduate.( because I am going deaf) Now, My debt when up 6 figures!!! I cannot afford $600 monthly payment, I am unemployed, and in my mid 50s. I read your article, very important to me. I need some advise!

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Hi eltessy, you may be eligible for discharge of your student loans because of disability. Please take a look at this page and see if it might help: http://studentaid.ed.gov/repay-loans/forgiveness-cancellation.

      • eltessy

        Thanks Benjamin! I already looking at that article!

  • sb386

    I have been paying my loans for years on time. My loan amount increased and I am trying to reconfigure for it. I was late with AES for the first time in years. Eighteen days. I got a letter stating it would be reported thirty days late. They just sent me a letter taking away my 2% reduction. I can’t believe this is the treatment I get after one late payment!

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      I’m sorry to hear that! It seems unfair that they would report it as 30 days late if it was only 18 days late. I wonder if you could call them and try to get them to reconsider (and reinstate the 2% reduction)? Always worth asking…

  • vik

    So…what happens if I can’t pay my student loans? Do you go to jail?

  • Amanda Jones

    What if you work for yourself? How can they garnish the money you make when you get money independently from clients.

  • http://www.twitter.com/bwfeldman Benjamin Feldman

    Hi Rae, I’m sorry to hear you’re having problems with your student loan debt. But it’s good that you have no credit card debt. No matter what, it would be helpful to contact your lender to see if you can work out an agreement. There may be an alternate repayment plan or forbearance option that can help you. This site can offer more details: http://studentaid.ed.gov/repay-loans/deferment-forbearance. If you have further questions, just ask us.